You negotiated an installment plan with the IRS, and they have been leaving you alone. As long as you continue to make that payment, IRS calls and letters are on hold, and everything is okay. To keep things running smoothly throughout the length of your installment plan, here are five things to keep in mind:
- Pay the fees on time.
Expect a monthly penalty of 0.5% of your outstanding balance until you pay off your taxes. You’ll also pay interest on your balance each month. The rate is set each quarter and is equal to the federal short-term interest rate plus 3%.
- If you can’t pay, remain in contact.
If your ability to pay has changed and you can no longer make payments on your installment agreement, call the IRS as soon as possible. You could be eligible to take advantage of several options, including reducing your monthly payment to reflect your current financial situation. Keep in mind that you may be asked to provide proof of changes in income, so have that information available when you call.
- Understand your agreement to avoid default.
The IRS will automatically apply your future refunds to your tax debt until it is paid in full. Even if the agency applies your refund to your account balance and a payment date is approaching, make sure you continue to make all scheduled payments. Always include your name, address, tax year, daytime phone number, Social Security number and return type on your payment.
- Watch out for reinstatement fees.
If your agreement goes into default, the IRS may charge you a reinstatement fee. Interest and penalties continue to accrue until you pay your balance in full. If you are coming close to defaulting on your installment agreement, contact the IRS as soon as possible.
- Ask for a breather.
Believe it or not, the agency can be accommodating if you’re on a short-term installment plan. A call with a request to skip a month’s payment might just earn you a “yes” from the IRS. However, make sure you call well in advance of when your payment is due, since calling after the due date has passed could put your account into default.
The IRS can be understanding – as long as you’re upfront and communicate about your situation. Lying, ignoring letters and phone calls and simply being unreachable are surefire ways to get your account tossed into default.